The great Indian disagreement on demonetisation, GST: Why economists are split

 

Over the past few weeks, a ferocious disagreement has raged between several Indian economists. The heart of the matter concerns the impacts of demonetisation and the goods and services tax (GST) on India’s broader economy. Let me be clear that I use the word disagreement rather than debate advisedly.

Surjit Bhalla, now a member of the prime minister’s economic advisory council, set the ball rolling by claiming that growth rates in rural wages suggested that demonetisation might not have slowed the economy, as much as is it is being made out to be. Instead, he argued that the Reserve Bank of India’s reluctance to soften interest rates was perhaps the bigger culprit. And lastly, the Central Statistical Organisation might have just ended up underestimating India’s GDP when it reported a 5.7% expansion through the April-June quarter.

Bhalla’s observations were undoubtedly aimed at correcting the grim picture that former finance minister Yashwant Sinha had been painting as the current status of the Indian economy. Soon enough, Himanshu, a professor at Jawaharlal Nehru University, chimed in with a detailed explanation on how real rural wages had indeed been declining for both agricultural and non-agricultural labour since 2014, and that Bhalla was cherry-picking his data. Former chief statistician Pronab Sen – advisor of many years to the Planning Commission – took up the baton from Himanshu by asserting that demonetisation might have actually slowed the economy more than even what the Central Statistical Organisation estimates had thus far indicated. Sen, moreover, was unconvinced that interest rates could have any role in the current slowdown.

Interestingly enough, all sides of the Bhalla-Himanshu-Sen quarrel also honestly acknowledge that the data on the Indian economy at their disposal is flawed and incomplete. Nonetheless, they can still claim as economists that even as their assessments widely diverge, they are talking about related facts and connected data sets. But does this then become an actual debate over economic facts or a disagreement over interpreting iffy data?

While it is only fair that one should argue that confusion over the meaning of economic data should prompt the Indian government to fix our statistical system – which suffers from serious deficiencies of quality and the way it is structured – there emerges an equally compelling question. Can you actually keep the politics out of an economic understanding that is full of factual uncertainties, flawed data points and troubling inconsistencies with statistical information?

In an earlier article of mine this March, I pointed out that methodological deficiencies in our data collection system can often lead to a range of misleading conclusions about the economy. When this NDA government first put out its estimates of GDP growth for the demonetisation quarter, they confidently asserted that the economy grew 7% despite the disruption caused by the decision to scrap high-value notes. That number was later revised downward, but not before those concerned used it to the hilt in defence of demonetisation and perhaps even fed a complacency about arresting the slide of the economy.

Bhalla-Himanshu-Sen will and can correctly assert that they are economists, not politicians. They can also rightfully claim that they are skilled in the arts and principles of economics as a rigorous academic field rather than in the smoke and mirror games of political subterfuge. However, it would be more than naïve to believe that interpretations about the economy – given what they are in India at the moment – can escape the taint of politics. And here is where my main point lies: given that this disagreement or quarrel is over interpretation rather than fact, the true story over the Indian economy is more likely going to be made more visible and intense in the streets rather than revealed with any clarity by expert economists. The 2008 financial meltdown had very few prescient voices before the fatal denouement made everyone wise, almost overnight.

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